Auctions

Allan Baitcher
 What is an auction?
Much broader than the common-sense
definition.
eBay is only one type of auction.
An auction is a negotiation mechanism where:
The mechanism is well-specified (it runs according to
explicit rules)
The negotiation is mediated by an intermediary
Exchanges are market/currency-based

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 Mediation
In a traditional auction, the mediator is the
auctioneer.
Manages communication and information
exchange between participants.
Provides structure and enforcement of rules.
The mediator is not an agent or a participant
in the negotiation.
Think of it as an automated set of rules.
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 Types of auctions
Open vs sealed-bid
Do you know what other participants are bidding?
One-sided vs. two-sided
Do buyers and sellers both submit bids, or just buyers?
Clearing policy
When are winners determined (occasionally,
continuously, once?)
Number of bids allowed
One, many?

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 Some classic auction types
English outcry auction
This is the auction most people are familiar with.
One-sided (only buyers bid)
Bids are publicly known
Variant: only highest bid is known.
Bids must be increasing
Auction closes when only one bidder is left.

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 Some classic auction types
Dutch outcry auction
Used to sell tulips in Dutch flower markets.
Closes quickly.
One-sided (only buyers bid)
Bids are publicly known
Bids must be decreasing
Auctioneer starts at max, lowers asking price until
someone accepts.
Auction closes when anyone accepts.

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 Some classic auction types
Vickrey auction.
One-sided (only buyers bid)
Bids are publicly known
Turns out not to matter whether bids are secret.
Highest bid receives the good, pays second-
highest bid.
Has the nice property that truth-telling (bidding
your actual valuation) is a dominant strategy.

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 Some classic auction types
First-price sealed-bid
This is how houses, construction bids, etc are sold.
One-sided (only buyers bid)
Bids are hidden; each buyer bids in secret.
Everyone bids once.
Highest (or lowest) bidder wins.
Bidder challenge: guessing the bids of other
buyers.
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 Some classic auction types
Continuous double auction
This is NASDAQ, NYSE, etc work
Two-sided: Sellers and buyers both bid
Matches are made continuously
Matches are made based on the difference between
the bid price (willingness to pay) and the ask
price (amount seller wants)
Bidder challenge: guessing future movement of
clearing prices.
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Auction (mechanism) properties
When choosing an auction type, one might
want:
Efficiency
Agents with the highest valuations get the goods.
If not, expect an aftermarket to develop.
Incentive Compatibility
The optimal strategy is to bid honestly
Easy for participants no need to counterspeculate
Easy to determine the efficient allocation.

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 Auction (mechanism) properties

How is surplus distributed?

Which consumers are happiest?
Who pays transaction costs? How much are
they?
Can the mechanism be manipulated by
coalitions?
How long does it take to close?
Can is be guaranteed to close in finite time?

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 Valuation of goods
Items to be auctioned can be:
Private value/independent value
The amount a person is willing to pay does not
depend upon how much others will pay.
Item will be consumed/used rather than resold
Electricity, computational resources, food
Common value
The amount a person is willing to pay depends upon
the value others place on the good
Item is bought as an investment
Stock, gold, antiques, art, oil prospecting rights

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 Valuation of Goods
Items to be auctioned can be:
Correlated value
Some private valuation and some common value
Item may have network effects e.g. VCRs,
computers.
Item may provide both value and investment some
artwork or collectibles.
Challenge with correlated/common value
goods: Estimating what others will pay.

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 The Winners Curse
Correlated and common-value auctions can lead to
a paradox known as the Winners Curse.
In a first-price auction, the winner knows that
he/she paid too much as soon as the auction is
over.
No one else would buy at that price.
Assumption: everyone has the same information.
Applicable to prospecting, buying companies, signing
free agents, investing in artwork, etc.
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 English Auctions
These are the most common auctions in
practice.
Bids ascend, winner gets the item at the
price she bid.
Optimal strategy, bid $0.01 more than the
next highest person.

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 English Auctions
In an open outcry auction, this is easy.
Just keep going until no one else is bidding.
For the seller to be happy, there must be enough
competition to drive up bids.
Open outcry can also reveal information to others.
This may be a problem.
Can also encourage collusion
Bidders agree to keep prices low, possibly reselling later.

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 English Auctions
In sealed-bid auctions, selecting a bid price
is a serious problem.
Need to guess what others will bid, and what
they think you will bid, etc.
Problem: item may not actually go to the
bidder who values it most.

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 Dutch auctions
Start at max, auctioneer gradually decreases
bid.
Strategy: bid $0.01 above what the next
highest person is willing to pay.
Equivalent in terms of revenue to a first-
price auction.
Has the advantage of closing quickly.

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 Vickrey auctions
In a Vickrey auction, the highest bid wins,
but pays the second-highest price.
If goods are privately valued, it is a
dominant strategy for each participant to bid
their actual valuation.
Prevents needless and expensive
counterspeculation
Ensures that goods go to those who value them
most.
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 Example: Vickrey auction
Highest bidder wins, but pays the second highest price.

$5 $3 $2

It is a dominant strategy for each agent to bid his/her

actual valuation.
Homer wins and pays $3
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 Example: Vickrey auction
Highest bidder wins, but pays the second highest price.
Homer: $5, Bart $3, Lisa $2
Overbids Underbids

Homer No change No change or loss

No change
Lisa/Bart or overpay
No change

It is a dominant strategy for each agent to bid his/her

actual valuation.
Homer wins and pays $3
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 Using Auctions for Scheduling
Auctions can be used for lots more than just
buying beanie babies on eBay.
A new and popular approach is to use
auctions for allocation of resources in a
distributed system.
Electric power in Sweden
Computational resources (disk, CPU,
bandwidth)
This approach is called market-oriented
programming.
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 Market-oriented scheduling
Appeal: if assumptions are met, we can find
the optimal schedule.
Participants in the system have no incentive
to misrepresent the importance of their job.
Much of the computation is decentralized
Since scheduling is often NP-complete, wed
like to avoid having a single process find a
solution.

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 Scheduling example
Consider a schedule with 8 1-hour slots from
8am to 4 pm
Each slot has a reserve price = $3
This is the cost needed to run the machine for an hour.
Bids must meet or exceed reserve.
4 agents have jobs to submit.
Agent 1: 2 hours (consec.), value $10, deadline: noon
Agent 2: 2 hours (consec), value $16, deadline: 11am
Agent 3: 1 hour, value $6, deadline 11 am.
Agent 4: 4 hours (consec), value $14.5, deadline 4pm

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 Scheduling Example
We cannot satisfy all agents
9 hours needed in an 8 hour day.
We would like to schedule the most
valuable jobs.
We need to accurately know which jobs are
the most valuable.
Everyone thinks their job is the most important.
This is the same as maximizing revenue in
an auction.
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 Scheduling Example
We use a Vickrey auction to allocate slots.
Each agent will bid their actual valuation for
the slots.
No incentive to counterspeculate.
Agent 1 will bid $10 for any two slots before noon.
Agent 2 will bid $16 for any two slots before 11 am.
Agent 3 will bid $6 for any one slot before 11am.
Agent 4 will bid $14.50 for any four slots.
So what is the solution?

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 Scheduling Example - solution
Lets start with afternoon
Only agent 4 is interested, so he gets the four afternoon
slots at reserve price + 0.25 (minimum bid)
Gets slots for $13, which is less than the value of the
job, so hes happy.
Morning
Agent 1 bids $16 for two slots ($8 per) no one else
can beat this, so hell get two slots (8am & 9am) at the
second price.
But what is the second price?

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 Scheduling Example - solution
Agent 2s bid:
price(s1) + price(s2) = 10, price(s2) >= $3.25
Since no one else wants s2, agent 2 can have s2 for $3.25. This means his
bid for s1 is $6.75
Agent 3 bids $6 for s1
We now have 3 resources and 4 bids.
The first three slots are allocated at $6.25 apiece, and the
remainder at $3.25
This is an equilibrium
At these prices, no one wants to change their allocation.
The most valuable jobs are scheduled weve maximized global
performance.
Each agent had no incentive to cheat the system

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THANK YOU

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